Stay or go?
If you decide to reinvest the pot elsewhere will you lose out or will you benefit? It’s a taxing question, says our financial expert
Should I stay or should I take my pension in one go?
The April 2015 pension changes mean that it is now possible to take your entire pension fund as a lump sum to spend as you wish. But, there may be considerable tax implications in doing so. The first 25 per cent of the cash you withdraw from your pension pot will be tax-free, the rest will be taxed as income at the relevant tax rate. However, there may be charges for cashing in your entire fund, and not all providers may offer this option.
Furthermore, some pension companies may require that you take independent financial advice before cashing in your entire pot. The main thing you will need to consider when thinking about taking all of your pension in one go is your tax situation.
Where your combined sources of income along with your pension pot will exceed £150,000, you will pay tax at the highest rate of 45 per cent. It is likely that you will pay tax on your pension at source via PAYE – this could mean you are using an emergency tax code and you will later need to claim back any overpaid tax. Spreading withdrawal of your pension pot over a number of years can greatly minimise the amount of tax you will pay and mean that your tax-free entitlement is also spread over several years.
Don’t forget what a pension is. A pension is a tax-efficient, long-term savings vehicle, designed to provide tax-free cash and income in retirement. The phrase “try not to outlive your money” was never truer than it is today
When to think about drawing your entire pot
It may be worth considering taking out your entire pension pot if you need the money quickly, if you are suffering poor health and a guaranteed income for life might not be appropriate, or if you have multiple pension pots and want to cash in one or two to give you more retirement income from the beginning.
Taking your entire pot might not be the best option
Taking out your entire pension pot might not be the best option where it is likely you will spend your entire retirement savings in a short amount of time; you are keen to avoid a large tax bill; you would like a regular income for yourself or for your spouse and any dependents after you die.
Reinvesting your pension pot: will I gain or lose?
Research conducted by MGM Advantage earlier this year shows that almost one third of people will look to reinvest their pension pot elsewhere after withdrawal. However, MGM has warned that doing so may substantially reduce its value. Although the figures also demonstrated that only 13 per cent of those surveyed intend to withdraw more from their pension than the tax-free allowance, 28 per cent of these people are planning to invest their pension money elsewhere. Be warned, however, that this could have drastic implications in terms of investment value.
Other investments do not enjoy the same tax benefits as a pension and also you would have to be sure of your new investment’s performance to ensure you would benefit from it. Furthermore, you would not receive the same guarantees as you would get with an annuity.
The tax implications of such a move might not be worth the pay off. The first 25 per cent of your pension pot will be tax-free, however the rest will be taxed as income. This means you may be paying more in tax than you reap from your investment.
Don’t forget what a pension is. A pension is a tax-efficient, long-term savings vehicle, designed to provide tax-free cash and income in retirement. The phrase “try not to outlive your money” was never truer than it is today. Currently, personal pension contributions can attract tax relief up to 45 per cent, so a gross contribution of £40,000 after 20 per cent basic rate tax relief at source, and up to a further 25 per cent relief claimed via self-assessment can net down to £22,000. Funds are invested in a tax favoured environment and can be accessed in full from age 55.
The new pension freedoms also facilitate generational planning, enabling pension funds to be passed to children and grandchildren. Unused pension funds will never form part of an Inheritance Tax calculation, as long as they remain within the pension plan wrapper. Clients must think very carefully and seek independent, professional advice before electing to take significant lump sums.
About the author
Alasdair MacDougall is director of Martin Aitken Financial Services. To contact Alasdair, call 0141 272 0000.
This article is based on our understanding of current HMRC rules and guidance, which may be subject to change. The purpose of this article is to provide technical and generic guidance and should not be interpreted as a person recommendation or advice. Martin Aitken Financial Services Ltd is Authorised and regulated by the Financial Conduct Authority.